THE International Monetary Fund Thread (merged)

[threadbear]

I'm just reading about Japan's experience during the "lost decade" which pretty closely mirrors what the U.S will go through. They had an asset price collapse, but I don't think retail prices fell all that much. I'd like to get more information on that. They SHOULD have fallen. Commodity prices weren't that high, so you'd think that they would have been overwhelmed by cheap exports. The only way it makes sense is if they had several large corporations that anchored the economy, that were impervious to competition...and indeed, they did, the car manufacturers, Toyota, Honda and companies like Sony....and yes, they also had trade policies which protected their anchor corporations.

It's all a big so what?...unless you compare and contrast with the U.S, how they might respond to a potential domestic deflationary price spiral in goods and merchandise. I see a wave of protectionism coming that could revitalize Detroit automakers and revitalize domestic manufacturing.

Thoughts?

[efarmer]

That is a interesting idea threadbear. One of the things I am aware
of in Detroit, Ohio, Pennsylvania, and all around the manufacturing
core of the country is how much supporting basic materials processing
and subassembly level processing has been dismantled underneath the layer of final assembly at high labor rate manufacturing that is left. In such economic conditions I wonder if we would have to gut military
spending and apply it to rebuilding our manufacturing base to
pull such a contraction back into our own capabilities off.

To date the end of life kicker for our empire is offensive military
based. The big fear sales pitch is that we can't ever stop our
military occupation and send it home without all of our enemies
following us back to get even. I predict we are going to find out
soon based on choice or necessity.

[uNkNowN ElEmEnt]

I doubt it, people aren't buying big cars because of the price of gas. unless they start selling smarter, more fuel efficient modes of transportation, nothing is gonna save their bacon.

[threadbear]

I doubt it, people aren't buying big cars because of the price of gas. unless they start selling smarter, more fuel efficient modes of transportation, nothing is gonna save their bacon.

They are, at the moment, focussing much more on plug ins.

[MrBill]

I'm just reading about Japan's experience during the "lost decade" which pretty closely mirrors what the U.S will go through. They had an asset price collapse, but I don't think retail prices fell all that much. I'd like to get more information on that. They SHOULD have fallen. Commodity prices weren't that high, so you'd think that they would have been overwhelmed by cheap exports. The only way it makes sense is if they had several large corporations that anchored the economy, that were impervious to competition...and indeed, they did, the car manufacturers, Toyota, Honda and companies like Sony....and yes, they also had trade policies which protected their anchor corporations.

It's all a big so what?...unless you compare and contrast with the U.S, how they might respond to a potential domestic deflationary price spiral in goods and merchandise. I see a wave of protectionism coming that could revitalize Detroit automakers and revitalize domestic manufacturing.

Thoughts?

Here is some genuinely refreshing analysis on Japan's lost decade. A very under applied approach to quantify growth in the real economy.

If GDP per head is nevertheless a superior measure of people's prosperity, why do governments not publish such figures each quarter along with their standard GDP figures? Population statistics tend to be less up-to-date than GDP figures and are generally not available on a quarterly basis. But that is a lame excuse: it should be much easier to count bodies than to put a value on diverse sorts of economic output. Not only do people have a right to know whether average living standards are rising or falling, but publishing such numbers could also benefit some countries. If Japan's government had drawn attention to the sprightlier growth in income per head in recent years, in contrast to endless reports about its “underperforming” economy, consumers may have felt cheerier and spent more—in other words, its GDP growth would have been stronger.

Grossly distorted picture



But basically I would agree. Tariff and non-tariff barriers to entry to the Japanese market ring-walled domestic industry to shelter them from foreign competition. The result was the emergence of a two tier economy. One extremely export competitive like Toyota, Honda and others. This was Japan's life line during the their darkest moments and responsible for the majority of GDP growth during this period. The other was the moribund domestic economy that was protected and therefore took much longer to reform itself and to write-off poor investments. And in support of such misplaced policies Japan has a public debt to GDP level of 160% that is the highest in the developed world.

UPDATE:
Japan Needs Paul Volcker to Escape `The Matrix'

[threadbear]

Mr.Bill, Why would Japan want to break out of it's Matrix? The article is writtenas if it's the job of the govt is to attract foreign investment, regardless of the further displacement and distortions that could cause.

Japan did the only thing it could do, during it's particular economic crisis, which was to erect trade barriers. Had they not, what on earth would have happened to that country in the 90's?

[MrBill]

Mr.Bill, Why would Japan want to break out of it's Matrix? The article is writtenas if it's the job of the govt is to attract foreign investment, regardless of the further displacement and distortions that could cause.

Japan did the only thing it could do, during it's particular economic crisis, which was to erect trade barriers. Had they not, what on earth would have happened to that country in the 90's?

I do not agree that erecting trade barriers was the answer to Japan's problems. But protectionism usually exacerbates competitive issues not alleviates them. However, some problems that have arisen from those policy choices in the 90s:

1 - aging population combined with very high debt to GDP ratio means more money to service debt, less money for social spending
2 - addicted to ZIRP, so any increase hurts debt servicing costs
3 - ZIRP exporting excess money supply growth to the rest of the world through yen carry trade
4 - excess money supply growth drives up asset prices including commodity or input prices
5 - coddled industries less competitive
6 - higher input prices/lower labor productivity makes Japanese exports less competitive
7 - shrinking population and low growth means that in absolute terms Japan's share of global GDP is falling
8 - that is fine except FDI flows to where it can earn a higher return and into markets that are growing, not contracting
9 - yen is undervalued so imports more expensive (see points 4 & 6)



10 - inflationary pressures are becoming global, so not just tied to a weak US dollar anymore. That means that one CB acting alone cannot really act to contain global inflation, only the way that it transmits itself into the domestic economy.

[threadbear]

That means that one CB acting alone cannot really act to contain global inflation, only the way that it transmits itself into the domestic economy.

Agreed. I understand all the arguments about how erecting trade barriers appears superficially appealing, but in the end, can hurt domestic economies. However, in the case of the U.S, at this point in time, I can't see how erecting a few trade barriers is going to do anything but help them. It won't do a thing to bring prices down, but it could certainly help by repatriating at least some of the outsourced jobs, retaining the ones they have, and hopefully put an end to IT jobs flowing out of the country while IT workers from India, flood in.

If they do this, it could be bad news for Canadians, but they have effectively erected barriers to trade already, simply by interpreting Nafta in any way they have seen fit, since it was instituted, so we'll be somewhat prepared for it.

[Gerben]

I understand all the arguments about how erecting trade barriers appears superficially appealing, but in the end, can hurt domestic economies. However, in the case of the U.S, at this point in time, I can't see how erecting a few trade barriers is going to do anything but help them. It won't do a thing to bring prices down, but it could certainly help by repatriating at least some of the outsourced jobs, retaining the ones they have, and hopefully put an end to IT jobs flowing out of the country while IT workers from India, flood in.

First of all trade barriers are inflationary. Domestic companies that were too expensive before now can compete with their higher prices.

Secondly: if you create barriers, then others will do the same. You don't want that. Not after US wages just went down by a third when measured in Euros. There's thousands of ex-bank employees who could make excellent factory workers. Keep your economy open and we'll start buying your cheap junk like you used to buy Chinese cheap junk.
Now we're just buying banks and other companies. But we prefer goods.

[threadbear]

I understand all the arguments about how erecting trade barriers appears superficially appealing, but in the end, can hurt domestic economies. However, in the case of the U.S, at this point in time, I can't see how erecting a few trade barriers is going to do anything but help them. It won't do a thing to bring prices down, but it could certainly help by repatriating at least some of the outsourced jobs, retaining the ones they have, and hopefully put an end to IT jobs flowing out of the country while IT workers from India, flood in.

First of all trade barriers are inflationary. Domestic companies that were too expensive before now can compete with their higher prices.

Secondly: if you create barriers, then others will do the same. You don't want that. Not after US wages just went down by a third when measured in Euros. There's thousands of ex-bank employees who could make excellent factory workers. Keep your economy open and we'll start buying your cheap junk like you used to buy Chinese cheap junk.
Now we're just buying banks and other companies. But we prefer goods.

The U.S. obviously can't and won't be able to compete with China or VietNam, or any other developing nation, but it can erect barriers and REcreate a more vibrant domestic economy, based on more than just pyramid financial schemes and shuffling of paper. It will be price inflationary, for sure, and far from Utopia. It will just be a way of navigating horrific times, that is a little less horrible than others I can imagine.

[MrBill]

Strategy is knowing what not to do. Competing on price is a losing game as there can only be one lowest cost producer. The most profitable products trade on features, advantages and benefits for the buyer or user. Erecting trade barriers will just reward poor workmanship at the expense of innovation. Trust me, it has been tried by many developing countries who wrongly pursued import substitution policies - like India - and their economies only started to bloom once they embraced open economies, inward investment and trade.

I am not an idealist. I am very pragmatic. I know the difference between free trade and fair trade. Between a comparative advantage and currency manipulation.

The USA has been running a large current account deficit for the past thirty five years that has now reached unsustainable proportions. That is a net wealth transfer out of the domestic economy. And after a few decades those outflows start to add up to some serious money.

That Americans - including its various levels of government - collectively spend more than they make (individuals -0.30% for the past 15-years) is the problem. Not jobs going offshore or trade per se. Of course, if you are importing BOTH goods AND capital to subsidize immediate consumption today at the expense of saving and investment then no matter how large the domestic economy or how many jobs it creates it will never be enough. That is why a weak US dollar cannot close the trade deficit alone.

In other words no matter how much money you make you can always spend more. But when you're deep in debt and have painted yourself into a financial corner then obviously you are very vulnerable to any external shock. In this case in the form of a falling US dollar; increasing inflation; falling asset prices; a refinancing boycott; a collapse in the value of collateral backing loans; and finally rising unemployment as firms cut back in expectation of falling demand as well as due to their own liquidity problems.

The Capital Structure Trap



A fundamental disequilibrium that has been building up over time is suddenly forced to break.

Exogenous Shock

Price of index asset drops

Corporations experience declining revenues and increasing debt costs
Investors see a reduction in asset values

Corporations hedge against index
Investors hedge against index or sell assets

Sell index assets

Price of index asset drops

Etc.

(continued)

5. The very act of closing out the position, of course, causes further price declines, which increase the number of actors that fall into the trap. The process is self-reinforcing until all actors are either fully hedged or in default. It is only then that the market stabilizes - perceptions of underlying value have very little to do with it.

Source: The Volatility Machine, Micheal Pettis, Oxford University Press, 2001, pg. 134-135

Of course, it would be a perfectly poor public policy response to a financial crisis caused by capital imbalances to erect protectionist trade barriers instead. Never mind that the US is the world's largest manufacturer and that its exports are at record breaking levels. The same mistakes were made by policy makers in the 1930s with the Smoot Harley Act. It did not prevent The Great Depression it just made it longer, deeper and infected the rest of the world. But, hey, protectionist policies are popular in election years! ; - ))

[Doly]

Erecting trade barriers will just reward poor workmanship at the expense of innovation.

There is one thing to be said in favour of trade barriers: they favour local products. Which might just be a good thing if the prices of transport are going up anyway because of peak oil.

[MrBill]

Erecting trade barriers will just reward poor workmanship at the expense of innovation.

There is one thing to be said in favour of trade barriers: they favour local products. Which might just be a good thing if the prices of transport are going up anyway because of peak oil.

Wrong!

[MacG]

Erecting trade barriers will just reward poor workmanship at the expense of innovation.

There is one thing to be said in favour of trade barriers: they favour local products. Which might just be a good thing if the prices of transport are going up anyway because of peak oil.

Wrong!

I suggest listening to Dr Ha-Joon Chang. Quite a blast. He talks about experiences from the real world, particularly Asia.

[Gerben]

I suggest listening to Dr Ha-Joon Chang. Quite a blast. He talks about experiences from the real world, particularly Asia.

He compares developing markets in Asia with the US. There are large differences. The US are already world leaders in a lot of different industrial products. US companies are technological leaders with a lot of products. If US wages continue to go down then those companies will reopen production in the US to serve the north american (and possibly European) market rather than serve this market from asia. Even if cost in the US are a litle higher. Outsourcing also has its cost.
If you look at Japan you can see an example on how protecting your market no longer works once you have reached a certain level of development.

[threadbear]

I suggest listening to Dr Ha-Joon Chang. Quite a blast. He talks about experiences from the real world, particularly Asia.

He compares developing markets in Asia with the US. There are large differences. The US are already world leaders in a lot of different industrial products. US companies are technological leaders with a lot of products. If US wages continue to go down then those companies will reopen production in the US to serve the north american (and possibly European) market rather than serve this market from asia. Even if cost in the US are a litle higher. Outsourcing also has its cost.
If you look at Japan you can see an example on how protecting your market no longer works once you have reached a certain level of development.

Protecting key sectors, worked very well, to stave off the ravages of a depression, for Japan. The US didn't raise more of a stink about it, because it was in their best interest not to. We're not talking textbook economics here, but what kind of lifeboat a society will take in order not to drown. Japan wasn't in a position to get all precious about what works best, in theory, nor will the U.S. be.

[MrBill]

threadbear wrote:

Protecting key sectors, worked very well, to stave off the ravages of a depression, for Japan. The US didn't raise more of a stink about it, because it was in their best interest not to. We're not talking textbook economics here, but what kind of lifeboat a society will take in order not to drown. Japan wasn't in a position to get all precious about what works best, in theory, nor will the U.S. be.

The political solution to any economic problem may or may not be the best one. There is no evidence that policy steps taken by the BOJ, MOF or MITI either made the Japanese slowdown less painful nor the recovery any faster.

Quite the opposite. There is a great deal of evidence that only Japan's export sector quickly recovered to become more efficient and externally competitive, while coddled domestic companies and industries languished.

The result is world beating companies on one hand, and on the otherhand a domestic economy that has suffered through 15-years of low, slow, no growth with three going on four official recessions. That is not a recipe for success. That is not the policy approach that any country should emulate.

I am not trying to be rude, but usually anytime that someone says textbook theory does not work in the real world likely knows very little about either. If you are trying to say that poor public policy can swamp good economic theory then I would agree. There are more than enough examples of this including the US' experiment of running current account deficits for the past thirty five years, and consuming more than it produces on borrowed time and money. But, of course, when it blows up, we'll blame economic theory and not public policy as usual! ; - ))

[threadbear]

threadbear wrote:

Protecting key sectors, worked very well, to stave off the ravages of a depression, for Japan. The US didn't raise more of a stink about it, because it was in their best interest not to. We're not talking textbook economics here, but what kind of lifeboat a society will take in order not to drown. Japan wasn't in a position to get all precious about what works best, in theory, nor will the U.S. be.

Quite the opposite. There is a great deal of evidence that only Japan's export sector quickly recovered to become more efficient and externally competitive, while coddled domestic companies and industries languished.

It was the big exporting companies, I previously mentioned that were protected. The domestic economy, of course, languished. But there wasn't mass starvation, major rioting in the streets etc.. etc...

[threadbear]

double post

[threadbear]

From Newsweek article 1999:

"A confident Japan would import goods from devastated economies elsewhere in Asia. A defensive Japan will do what it always does: export its way out of trouble. And as the flood of Japanese products to the United States increases, the danger grows of a trade war with Washington".

Looks like raising trade barriers and trying to export your way out of trouble works best. Witness the lack of bloodshed in Japan, and count on the US to try to do the same thing. It will reindustrialize with a cheap dollar, close it's doors to foreigners, when and where it can. Some of the transnational corporations won't like it, but you know, they can all...how can I put this in genteel economic terms....get stuffed?